This chapter will cover the following:
- common regulatory framework issues and general considerations;
- corporate structures typically used; and
- usual forms of securities.
Common regulatory framework issues and general considerations
Article 27 of the Constitution of Mexico states that resources are the heritage of the nation and, therefore, it is the federal government that sets the conditions for these resources to be exploited. In general terms, this applies to a great majority of Latin American countries.
However, project financing in general is not governed by one specific law – it depends on the type of project and lenders. In other words, the legal framework depends on the project’s nature. In the mining sector, in order to finance and execute a project, rules and laws applicable to mining activities must be observed.
The current rules and laws applicable to mining activities in Mexico are as follows:
- the Constitution of Mexico;
- the Mining Law;
- the Mexican Official Standards;
- the Commerce Code;
- the Foreign Investment Law;
- the General Law of Commercial Companies;
- the Law of Credit Transactions and Negotiable Instruments;
- the Law on Public-Private Partnerships;
- the Expropriation Law;
- the Agrarian Law;
- the General Law on Ecological Balance and Environmental Protection; and
- other state and municipal laws and regulations that govern, among other things, zoning, the environment and water.
The Mining Law
The Mining Law regulates the exploration and exploitation of minerals in Mexican territory.
In order to engage in such activities in Mexican territory, it is essential to obtain a concession from the Ministry of Economy, which is the highest authority in the mining sector. A concession granted by the Ministry of Economy will last for a period of 50 years from its inscription in the Mining Public Registry, and can be renewed for the same period if the concession is not cancelled for any reason.
The Mining Law states that exploration and exploitation activities in the mining sector can only be performed by individuals with Mexican nationality, communal landholdings and entities duly incorporated under Mexican laws that have their legal address in Mexico, and that include in their corporate purpose the exploration and exploitation of minerals. In regard to Mexican entities with foreign investment, rules found in the Foreign Investment Law must be observed. Depending on the activity, limits on foreign investment may apply. This is something that also applies, in general terms, in other countries in the region.
The process for obtaining a concession depends on its type. Some common elements of all of them include paying a fee to be considered a bidder (if there is a public process), or to get title over private land.
Once the concession is secured, certain rights must be acquired, such as being able to perform activities of exploration and exploitation at the mining site; dispose of the mineral products obtained; and obtain the expropriation, temporary occupation or easement over lands in order to perform activities of exploration and exploitation, etc.
The concession holder also has some obligations, including the following:
- executing the mining activities under the Mining Law;
- paying for the mining rights;
- complying with the Mexican regulation2 regarding safety in mines and environmental protection;
- periodically providing, to the Ministry of Economy, technical and accounting reports;
- reporting to the Ministry of Energy the discovery of any hydrocarbons;
- paying mining duties during the life of the concession (failing to pay can result in the cancellation of the mining concession); and
- paying an annual mining royalty equivalent to 7.5 per cent of the income derived from the mining exploitation activities after permitted deductions, etc.
Holders of gold, silver or platinum concessions must pay an extraordinary annual mining royalty equivalent to half of all revenues resulting from the sales of minerals.
Depending on the concession specifics and type, there might be other royalties or charges to be paid, such as to the Geological Service, which is a federal government agency in charge of conducting research and identifying the potential mineral resources of the country. This royalty or charge is determined by the Ministry of Economy.
Finally, when exploring the option of investing in or executing a mining business, consider that most countries restrict or tax certain exports, requiring additional permits or authorisations, or both, that must be approved by the government. In the particular case of Mexico, the Ministry of Environment and Natural Resources is the competent authority to issue such permits and authorisations for the export of minerals and natural resources.
It is important to consider some additional requirements prior to the execution of any project, such as registration before the Mining Public Registry.
In Mexico, in order to obtain a mining concession, the following steps must be taken:
- company’s registration before the Ministry of Health;
- confirmation with the corresponding Mining Department that the land area or field of interest is free. If it is free, submit the concession request to the proper mining agency in the corresponding state (ie, the General Mining Agency in Mexico City);
- if all the requirements are met, the mining agency will record in the request that it was accepted for review and processing, and will issue the certificate to the applicant. Validity runs for 60 working days, so a mining expert can make an assessment of the land lot;
- if requirements are complied with and satisfied, the Mining Department will issue an opinion on the mining lot assessment report, which should be completed within 20 working days of the date of its submission;
- the Mining Department will issue a concession proposal, and will forward the proposal to the Mines General Directorate to continue with the application process;
- the Mines General Directorate, through the Department of Cartography and Mining Concessions, will cartographically validate the concession proposal and verify that the lot is free for concession, and will issue a recommendation within the next 15 working days granting the mining concession previously validated by the Ministry of Energy; and
- if all conditions and requirements set forth in the Mining Law and its regulations are satisfied, the Ministry of Economy will grant the concession.
The Mexican Official Standards
The Mexican Official Standards set forth technical rules regarding mining activities that must be observed in order to structure and execute a project in the mining industry.
The Commerce Code
The Commerce Code regulates all commercial acts and agreements. In order to execute a finance or security agreement for a project finance transaction in Mexico, the rules of the Commerce Code must be observed.
The Foreign Investment Law
The Foreign Investment Law regulates the participation of foreign investors in Mexican entities. In regard to the mining sector, foreign investors can acquire up to 100 per cent of the shares of the Mexican entities with mining concessions, as long as they agree with the Ministry of Foreign Affairs to be treated as Mexican citizens in respect of their equity participation in the concession holder.
The General Law of Commercial Companies
The General Law of Commercial Companies governs corporations and limited liability companies. If any these entities are used as corporate vehicles for financing a project, the rules set forth under this law must be observed.
The Law of Credit Transactions and Negotiable Instruments
Securitisation instruments used for project financing must comply with the Law of Credit Transactions and Negotiable Instruments.
Law on Public-Private Partnerships
Under the Law on Public-Private Partnerships, a project finance transaction in the mining sector can be structured with the participation of the federal government and the private sector as partners in the planning of the transaction. Public-private partnerships (PPP) are used to develop projects where a federal agency sponsors the relevant project, or federal funds contributed by the government are used for the project.
It is common practice for PPPs in mining or infrastructure projects to take advantage of project finance schemes for the purpose of optimising available resources, as well as efficiency, capacity and time considerations, among others.
PPP schemes can be used to conduct infrastructure projects in any areas of the Mexican economy where the private sector is free to participate, either directly or through a concession or authorisation, where rendering public services or using government property is involved (as occurs in the mining sector).
The Expropriation Law
Under the Mining Law, a concession holder for the exploration and exploitation of minerals can request from the Ministry of Economy the expropriation of private property in order to perform such activities. The expropriation procedure and its rules are governed by the Expropriation Law.
The Agrarian Law
One of the essential matters regarding an infrastructure project in the mining sector is the ownership of the land where the project will be executed. In some cases, the land owned may be an ejido, a piece of land comparable to common land, assigned mainly to be conjointly used by the ejido members for agricultural and livestock production. In these cases, in order to execute a project on common land, the provisions of the Agrarian Law must be observed and complied with since the Agrarian Law regulates such land.
The General Law on Ecological Balance and Environmental Protection
For the exploration and exploitation of minerals in Mexican territory, it is necessary to obtain an authorisation, based on an environmental impact assessment, from the Ministry of Environment and Natural Resources in regard to the environmental impact that such activities could generate.
The environmental impact assessment will determine the terms and conditions that the Ministry of Environment and Natural Resources will impose on the mining works and activities in order to prevent or minimise the negative effects on the environment.
The rules and procedure for such authorisation, and the environmental impact assessment, are regulated by the General Law on Ecological Balance and Environmental Protection.
Other state or municipal laws and regulations that govern zoning, the environment and water
There are some municipal laws and regulations3 that govern certain issues in an infrastructure project, such as the granting of permits, licences, concessions and authorisations required for the construction and operation of the project. Such laws and regulations will vary depending on the geographical location where the project will be developed.
In case of conflicting laws, Mexican law has adopted the principle that any agreed foreign law is binding and enforceable in Mexican courts provided it is not contrary to Mexican public policy or was wilfully chosen to defraud Mexican public policy. Therefore, project and financial agreements may be governed by whichever law the parties agree upon regardless of the Mexican conflict-of-laws rule. There is no need for a relationship between the chosen applicable law and the parties, or the subject matter of the contract.
Nonetheless, the parties of project agreements for infrastructure development generally choose to be governed by Mexican law owing to the regulatory and local issues surrounding the contracts, and the interference foreign law could have with the permits and concessions. Project agreements related to a federal government procurement process are governed by Mexican federal laws. This situation does not represent a conflict in the international lending community.
However, real estate property rights must be governed by the law applicable to the location where the property is located, according to the Mexican conflict-of-laws rule. Therefore, the governing law for real estate property rights, including security interests, may not be chosen and will always be Mexican federal or local law.
Federal government agencies involved in the Mexican mining sector
Ministry of Finance and Public Credit
The Ministry of Finance and Public Credit’s mission is to propose, manage and control the economic policy of the federal government’s financing, taxation, spending, income and public debt, in order to consolidate an economy that is equitable, inclusive and sustainable, and thereby strengthen the wellbeing of Mexicans.
In regard to the mining sector, the Ministry of Finance and Public Credit is in charge of collecting and receiving the compulsory payment of mining duties.
Ministry of Economy
The Ministry of Economy is responsible for improving the productivity and competitiveness of the Mexican economy – through innovative policies in the industrial, commercial and service sectors, as well as through the support of entrepreneurs and businesses of the social and private sectors – based on regulatory improvement, market competition and diversification of foreign trade, for the wellbeing of consumers.
It grants concessions for the exploration and exploitation of mining resources in Mexican territory. Through the Mining Undersecretary, it supervises and coordinates the mining activities and the enforcement of the Mining Law, as well as the coordination of the Geological Service and the Mining Development Trust.4
Ministry of Agricultural, Territorial and Urban Development
The Ministry of Agricultural, Territorial and Urban Development is an institution of the Federal Public Administration whose purpose is to plan, coordinate, manage, build and run public territorial management policies; ensure decent housing, and urban and rural development; and provide legal certainty to agricultural centres. It is in charge of the Committees for Regional Development for Mining Areas.
Since, under the current regulatory framework in Mexico, a mining concession does not confer any right to its holder on the surface land area, in order to carry out its exploration or exploitation, the National Agrarian Registry, the Agrarian Agency and the National Trust Fund for Ejido Development – which belongs to this Ministry – must participate in the process of authorisations when common land is involved.
Ministry of Environment and Natural Resources
The Ministry of Environment and Natural Resources is responsible for promoting the protection, conservation and restoration of the ecosystems and natural resources of Mexico, including environmental goods and services in order to promote their sustainable use.
It is also entitled to grant authorisations and permits regarding issues such as environmental impact and change of land use on forest land, managing of mining waste, as well as reporting and controlling air emissions and wastewater discharges into national waters and resources.
Ministry of Energy
The Ministry of Energy aims to establish and lead the country’s energy policy (within the constitutional framework) monitor compliance with an emphasis on energy security diversification, and ensure a competitive, high-quality, economically viable and environmentally sustainable energy supply that the development of national life requires.
There are some cases where activities of exploration and exploitation of minerals can coexist with the exploration and extraction of oil and other hydrocarbons. In such cases, the Ministry of Energy together with the Ministry of Economy may draw up rules so that such mining activities can coexist.
Since the Ministry of Energy authorises activities regarding the exploration and extraction of oil and other hydrocarbons, in the event that activities regarding minerals and oil coexist, the Ministry of Energy must be involved.
Ministry of National Defence
The General Directorate of the Federal Register of Firearms and Explosives Control is an agency of the Federal Public Administration under the Ministry of National Defence. Its mission is to regulate the activities under the Federal Law on Firearms and Explosives and its regulations on the control and monitoring of industrial and commercial activities and operations carried out with weapons, munitions, explosives, devices and chemicals.
Various general, ordinary and extraordinary permits are processed before the General Directorate of the Federal Register of Firearms and Explosives Control for the use and handling of explosives in the mining industry in the area of purchase, storage and use of explosive material.
Corporate structures typically used
The corporate structure typically used in project finance regarding the mining sector depends on several factors – for example, the complexity of the project, level of investment required (need for equity) and the players involved.
The most common structure used in Mexico for project finance in the mining sector is through the incorporation of a new corporate entity – either a stock corporation or the equivalent to a limited liability company – as a special purpose vehicle for the project.
Limited liability companies are used more frequently since they provide certain benefits in terms of corporate governance and tax matters (especially for US developers, as they qualify as flow-through vehicles under US ‘check-the-box’ rules). Since the legal amendments in 2014, stock companies have become more flexible in terms of their structure, and may establish certain requirements for the transfer of shares, and economic and voting rights, among other matters.
The corporate scheme for a project finance transaction may also be structured as a subholding company, which may have other operating subsidiaries, and may include a personnel service company solely in charge of staffing services.
As an alternative to the traditional limited-recourse project finance deals, there are schemes that are less burdensome to the developers. Additionally, a wide range of securities, including project bonds (by private and government investments), participation certificates issued by real estate trusts (similar to real estate investment trusts), development capital certificates issued by trusts that finance more than one project and private equity funds used to hold participation in the companies developing projects, are also being implemented.
In order to establish a mining company in Mexico, the following steps must be taken:
authorisation by the Ministry of Economy of the company’s business name;
- authentication of articles of incorporation of the company before a notary public (the corporate purpose must include the exploration and exploitation of minerals);
- registration before the Registry of Foreign Investment, if there are foreign shareholders;
- registration of the company before the Ministry of Finance and Public Credit, as well as before the Ministry of Health and municipal administrators of the sanitary licence and health control cards;
- processing of an environmental impact assessment before the Ministry of Environment and Natural Resources or municipal authorities, or both, for any exploration and exploitation activities;
- filing for a permit for the use of explosives before the Ministry of National Defence; and
- filing for a permit for the water usage before the National Water Commission.
If the above steps are followed and all permits are granted, the mining company will be established and ready to participate in a public bid for a mining concession.
Usual forms of securities
Securitisation comprises any contractual tool that secures a debt service. There are no restrictions on securing all kinds of assets, but it is most prevalent in the following:
- real estate;
- movable property;
- financial instruments (such as shares and debt securities);
- contractual rights;
- claims and receivables;
- cash deposits; and
- tangible assets (ships, machinery, etc).
In Mexico, the most used securitisation forms are the security trust and the non-
Under the scheme of a security trust, a settlor transfers title to a series of assets and rights to a trustee, which is usually a Mexican banking institution, since under Mexican law only specific entities can act as trustees. Such trustee will hold title of the assets and rights transferred, as there are outstanding obligations under the financing arrangements. The settlor may retain a beneficial interest to use and profit from the estate of the trust in the ordinary course of business, as long as no defaults occur. If a case of default arises, the trustee is contractually authorised to foreclose on the trust estate through tailor-made foreclosure procedures established in the trust indenture, including out-of-court foreclosure (subject to certain due process requirements).
Security trusts over contractual rights require notice to all counterparties about the transfer of rights to the trust. Security trusts involving personal property generally need to be in writing and registered with the Sole Registry of Personal Property Guarantees to be fully enforceable and obtain priority with respect to other security interests.
The biggest advantage of the security trust in Mexico is that the beneficiary can request that the trustee proceed to the sale of the assets without judicial intervention. Obviously, all the contractual obligations in the trust agreement must be fulfilled.
Another important advantage is that the assets held in the trust are not considered part of the debtor’s estate in the event of bankruptcy. This is because the law stipulates that the settlor transfers the assets and rights thereto to the security trust, which effectively separates them from the rest of settlor’s assets (there are some exceptions to avoid fraud, of course).
The non-possessory pledge allows lenders to create a security interest on all types of property, including machinery and equipment, inventory, bank accounts, receivables, contractual rights, rights under permits and authorisations, and any other intangibles. In addition to security trusts, a security interest over a sponsor’s equity in the project company can be secured through an equity interest pledge agreement.
Subject to customary limitations, security arrangements created as non-possessory pledges – as happens with security trusts – typically allow debtors to maintain the possession, use and even the disposal of the secured property in the ordinary course of business.
Security agreements must be formalised before a Mexican notary public, or notary for commercial matters, and recorded in the relevant public registry, in order to be valid and enforceable against third parties. Non-possessory pledge agreements and security trust agreements must be registered in the Sole Registry of Personal Property Guarantees to be valid and enforceable against third parties. In addition, security trusts that hold real estate property as part of the trust’s estate, must also be registered before the Public Registry of Property of the state in which the real estate property is located.
In regard to the mining sector, for information purposes only, non-possessory pledges created over rights under a mining concession must be registered before the Mining Public Registry.
Registration fees and notarial fees are the main costs associated with the effectiveness and perfection of security documents, and they vary from state to state. Notarial fees are subject to maximum levels established by state governments; however, notaries are normally allowed to grant discounts, which are often obtained for large transactions. Likewise, some local laws allow for discounts on the applicable registration fees when the transaction is related to a project that proves to be beneficial for the relevant state (eg, infrastructure in the mining sector).
Security trusts and non-possessory pledges in Mexico are governed by the General Law of Negotiable Instruments and Credit Transactions.
However, depending on the parties involved, there are a number of other laws applicable to security trusts such as the Credit Institutions Law, the Securities Market Law and, in cases where one of the parties in the transaction is from another country, the Foreign Investment Law.
 Andrés Nieto Sánchez de Tagle is a partner at Von Wobeser y Sierra, SC.
 Mexican Official Standards :NOM-120-SEMARNAT-2011; NOM-023-STPS-2012; NOM-141-SEMARNAT-2003.
 For example, building regulations for the municipality of Hermosillo; Federal District Law of Urban Development; and Federal District Law of Environmental and Land Protection.
 The Mining Development Trust is a public trust that promotes the development of the mining industry in the country, providing technical assistance and financing services in order to create and boost mining projects.